Does Amazon Engage in “Razor and Blade” Pricing?

Some people have suggested that Amazon’s pricing of products such as the Kindle e-reader is similar to the pricing strategies of razor manufacturers: sell the primary product cheaply (and maybe even at a loss), and make it up on the back end through the sale of complementary products (in the case of razors, razor blades; in the case of Kindles, e-books).

The courts have not uniformly settled on an approach to this pricing strategy. When the products are actually bundled together for sale, some courts have concluded that bundled pricing is lawful so long as the price of the entire bundle exceeds some appropriate measure of its cost. See, e.g., Cascade Health Solutions v. PeaceHealth, 515 F.3d 383 (9th Cir. 2008). But compare LePage’s Inc. v. 3M, 324 F.3d 141 (3d Cir. 2003) (en banc). State law is often even less clear in this area. (California, for example, has a specific loss leader statute.) And of course, Kindles aren’t actually bundled with e-books; you can buy a Kindle and never buy an e-book (you could use the Kindle to read your own PDF files, for example), so bundled pricing may not technically be involved. (Razors are almost always sold with some blades, by contrast.)

Given the somewhat unsettled nature of the law, I was interested to see a Wall Street Journal / AllThingsD interview last week with Amazon’s founder and CEO Jeff Bezos.

Mr. Bezos stated that Amazon does not like the razor and razor blade model, but also does not like the “other” model, “where you make a lot of money on the device.” As to the Kindle specifically, Amazon does not want to “lose a lot of money on the device.” Mr. Bezos wouldn’t disclose specifics, though.

So for whatever reason, even though Amazon perhaps arguably could do so, it apparently isn’t losing money on Kindles and making it up on e-books. (If it were doing that, it’s hard to see how Amazon could be engaged in e-book price predation, as some have alleged.)

The Kindle price points are impressive, though. I have no actual information, but I would guess that, given Mr. Bezos’ comments, Amazon is probably just about breaking even on the Kindle hardware (in total – maybe not on each device, especially the newer, more sophisticated ones). Amazon seems happy to sell you a Kindle, but they are equally happy to sell you books that you read on a tablet or a PC. In the very long run, selling Kindles helps create and maintain demand for e-books, and Amazon still hopes to be king of e-book distribution.

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